Fitch downgraded the rating for Canadian cannabis producer Canopy Growth to CCC, the agency’s fifth-lowest rating, and warned of potential further negative actions.
Fitch’s CCC rating carries substantial credit risk with a “very low margin for safety” and a “real possibility” of default, per the agency’s ratings scale.
Canopy’s issuer default rating was previously rated B-, or highly speculative.
Fitch Ratings said the downgrade reflects:
- Significant market-share losses in the Canadian cannabis market.
- Execution missteps.
- Challenges pivoting its cultivation strategy.
“As a result, it is highly doubtful that Canopy can improve EBITDA trends to reach operating cash flow breakeven in fiscal 2025 (by March 31, 2025) as Fitch previously expected, and creates greater uncertainty around capital structure sustainability,” Fitch noted in its commentary on the ratings action.
Canopy’s financial year ends March 31.
The credit-rating agency said it could cut Canopy’s rating again if:
- Canopy displays a lack of execution on its premiumization-cultivation strategy.
- Fitch concludes the strategic incentive for alcohol giant Constellation Brands to support Canopy has slipped.
- Canopy pursues a repayment/refinancing of notes worth 600 million Canadian dollars ($466 million) that Fitch considers a distress debt exchange.
Fitch noted that the Canadian cannabis market grew by 50% to CA$4 billion ($3.1 billion) in 2021, but Canopy’s Canadian cannabis sales fell 10% in fiscal 2022, partly from the shift away from the value segment.
Regarding the upcoming July 2023 repayment of the CA$600 million in notes, “Fitch believes Canopy’s financing options have become more limited given the broad downturn in market conditions,” the rating company said.
“Fitch expects the company could seek options to preserve liquidity given ongoing high cash burn. As such, the company could pursue a notes repayment option that Fitch views as a distressed debt exchange.”
Fitch also highlighted Canopy’s cash position, noting that cash and cash equivalents fell to CA$1.4 billion at the end of the previous fiscal year, down from CA$2.3 billion one year earlier.
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“The ongoing cash burn and M&A strategy combined with current market conditions have eroded Canopy’s liquidity position and could hamper its ability to access additional capital,” according to Fitch.
The full Fitch report on Canopy is available here.